Question

Pharoah Corporation factors $251,700 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2020. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments. (b) Assume that the conditions are met for a transfer of receivables with recourse to be accounted for as a sale. Prepare the journal entry on August 15, 2020, for Pharoah to record the sale of receivables, assuming the recourse obligation has a fair value of $5,010. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Cash received (251,700*94%) $236,598

Add: Due from factor (251,700*4%) $10,068

Less: Recourse obligation $5,010

Net proceeds $241,656

Gain/Loss = Carrying value - Net proceeds

Gain = $251,700 - $241,656

Gain = $10,044

Journal entry

Date Account Titles Debit Credit

Aug 15,2020 Cash $236,588

Due from factors $10,068

Gain on sale of receivables $10,044

Recourse liability $5,010

Account receivable $251,700